We have been exploring possibilities for how to adjust the City’s business license tax to help preserve services for the residents of the City and the businesses that are part of the fiscal tapestry of the City.
By exploring these possibilities, we hope to illuminate some possible paths to overcoming the structural deficit facing the City over the next five years. Much like the history of the reclaimed land on which the City is built, exploring these possibilities seeks to shore up the resources needed to protect the City, the people that call it home, and the businesses that have chosen to locate here.
We have been working extensively with our business license modernization team to review the City’s current structure, compare that structure to others in our area, and review possible paths to our goals.
This summary presents a few highlights of the work so far.
What is a business license tax, and how is it measured? The business license tax is a tax on “carry[ing] on any business, trade, profession, calling, or occupation in the City.” (Foster City Municipal Code (FCMC), sect. 5.04.030).
Once we know what is taxed, we need to measure how much of that taxable activity is occurring within the City (or subject to the City’s taxation powers). For ease of reference, we call this the “measure of the tax.” In most cases, business license tax uses proxies for the measure of taxable activity. Those proxies fall into the three significant alternatives for measuring taxable activity: inputs (like the number of employees), flat taxes, and outputs or gross receipts. The chart below summarizes the key points of comparison for the different measures.
Continued on the next page.
Major Types of Measurements
Measure Type Measure Pro Con
Input Per Employee •Maybe less volatile
than gross receipts
•Higher burden on businesses with more labor
inputs (like restaurants) that have already seen
their costs of goods sold increase.
•Doesn't capture per-employee productivity gains
from technology.
Input Square
footage
•Fixed amount for
calculation
•Can be tricky to calculate.
•Tends to miss the business activity occurring at
other than floor level. (For example, if you have a
warehouse that has shelving that is 20 feet high,
but you are only measuring the square footage
imprint, your measure misses significant business
activity.
•Is limited to only businesses with a location in the
city, reducing the tax base.
Input Unit •The units of input may
already be tracked.
•Does require pro-ration and may only have a
weak relation to the amount of business activity.
Flat N/A •Easy to calculate. •No clear relationship to the amount of taxable activity.
Output Gross
Receipts
•Closer relationship to
the amount of
business activity since
it captures the output
of the taxable activity.
•Can include alternative
measures for the cost
of operations without
traditionally
recognized "gross
receipts."
•Increase in the volatility of revenues since they
are pegged to the outputs of the business
activities.
•In some cases, may be harder to calculate.
•Under State law, it cannot be based on net
income.
What is Foster City’s current business tax structure?
Category
Minimum
Tax
Gross
Receipt
Rate
Maximum
Tax
Business
Count
Total Reported1 Gross
Receipts Tax Collected
General
Contractor $200 449 $204,000,000 $203,000
All Other
Businesses $100
$0.75 per
thousand $28,597
1,202 $59,895,000,000 $1,448,000
Totals 1,651 $60,099,000,000 $1,651,000
1 Gross receipts represented in the tables is based on the reported gross receipts, given the low cap there is reason to be cautious about concluding that all of that revenue is from taxable activity in Foster City.
The City currently uses gross receipts as its measure of taxable activity. The key features of the City’s current gross receipts tax—at least as they impact revenue—are the minimum tax and maximum tax (or cap). Please note that both in the table above and throughout this summary, we have used the data from the 2023 licensing period, which is to say any license that expired in 2023, when providing details from the City’s existing tax structure and, when estimating the current revenue, we actually used a lower amount than the actual results in 2023 to adjust for some uncertainties in the gross-receipt reporting (as noted in footnote 1, below).
How does Foster City’s tax structure compare to other cities? Foster City is about in the middle of the comparison cities on a per capita basis.
City Revenue
Per Capita
Sausalito6 $226.96
Richmond $72.92
San Mateo $62.83
Daly City $54.44
San Bruno $51.88
Foster City $46.85
South San
Francisco $41.47
Belmont $37.70
San Carlos $36.16
Burlingame $28.35
Union City $25.49
Hayward $19.46
Table 3:
Revenue Per Capita Comparison
If we compare the City to others in the region, using the hypothetical businesses in the two tables below, Foster City is currently imposing a lower tax than about half of the comparison cities. The key driver of that difference is the City’s cap on taxable gross receipts.
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Sample Business
Gross Receipts/
Employee/Units
Foster
City Belmont Burlingame Daly City Hayward
Outside Sub-Contractor $6,000 / 1 Emp $100 $376 $200 $110 $53 Home-Based Cottage
Food / Retail $22,000 / 1 Emp $100 $376 $200 $110 $16
General Contractor -
Remodeling $85,000 / 3 Emp $200 $446 $200 $110 $53
Business Service $450,000 / 5 Emp $338 $516 $300 $385 $120 Engineering Firm $500,000 / 5 Emp $375 $516 $300 $440 $632 Restaurant Chain $625,000 / 50 Emp $469 $1,391 $300 $578 $167 Family Dentistry $2,000,000 / 10
Emp $1,500 $691 $750 $2,090 $2,627
Apartment Complex
$5,000,000 / 20
Emp /
150 Units
$3,750 $5,500 $750 $5,390 Repealed
Large Retailer -
Grocery Store
$20,000,000 / 300
Emp $15,000 $10,841 $750 $21,890 $5,399
Business Services –
Large Firm
$350,000,000 / 400
Emp $28,597 $14,341 $750 $384,890 $94,499
$50,428 $34,994 $4,500 $415,993 $103,567
Sample Business
Gross Receipts/
Employee/Units
Foster
City
San
Bruno
San
Carlos
San
Mateo
Outside Sub-Contractor $6,000 / 1 Emp $100 $75 $253 $40 Home-Based Cottage
Food / Retail $22,000 / 1 Emp $100 $100 $253 $25
General Contractor -
Remodeling $85,000 / 3 Emp $200 $100 $253 $100
Business Service $450,000 / 5 Emp $338 $478 $271 $366
Engineering Firm $500,000 / 5 Emp $375 $530 $321 $394
Restaurant Chain $625,000 / 50 Emp $469 $630 $966 $466
Family Dentistry $2,000,000 / 10
Emp $1,500 $1,480 $446 $1,249
Apartment Complex
$5,000,000 / 20
Emp /
150 Units
$3,750 $3,130 $796 $2,959
Large Retailer –
Grocery Store
$20,000,000 / 300
Emp $15,000 $8,080 $3,055 $11,509
Business Services –
Large Firm
$350,000,000 / 400
Emp $28,597 $116,980 $3,055 $199,609
$50,428 $131,583 $9,669 $216,718
What possibilities are there to modernize the tax and preserve services?
We are continuing to explore options for addressing the needs of small businesses and our community with various alternative tax models that can lower the tax that smaller businesses pay (by lowering the minimum tax), increasing the gross receipt rate modestly, and having larger businesses pay more of their fair share by increasing the cap. Models along that line could potentially increase business tax revenue up to $1 million per year.